Last time I discussed the first three reasons you should love investing in the stock market. I will continue here with the next three reasons.
4.) Investing in the stock market, if done correctly, is considered by experts as the best investment.
In his book Stock for the Long Run, Prof. Jeremy Seigel shows a graph proving this point. (Data was gathered from 1802 to 1997, a span of 195 years) According to him, despite the stock market’s volatility and fluctuations, most of the time, stocks take the lead over all other vehicles of investment. The greatest stock-market crashes have become a mere blip in the chart. Hypothetically, a dollar invested (US) and reinvested in stocks in 1802 will be equivalent to $7,500,000 by the end of 1997!
To give you an example with a local application, in the Philippine stock market I read in an article somewhere that the year 1986 saw the recorded highest return rate for stocks at 224 percent. The lowest rate of return was in 1997, when we had a negative 41 percent. Nevertheless, if you held on to your money for the long term (a holding period of about 20 years), the average return is still somewhere from 24 percent to 28 percent per year.
But how does investing in stocks compare to investing in real estate? Well, there is, indeed, money to be made in real estate, but with certain disadvantages compared to stocks. To compare real-estate with stock-market investments, let me quote from famed fund money manager Peter Lynch. In his book One Up on Wall Street, he wrote that for 362 years the Indians of Mahattan have been subject to cruel jokes, because they sold the entire Manhattan Island (now part of New York City) for trinkets and beads (worth $24) to immigrants. However, it turned out that they have made a better deal than the buyers who got the island. If the Indians invested the $24 at 8 percent per annum, compounded over the next three centuries, the amount today would be about $30 trillion US dollars! Even if you reduce the interest rate of return to 6 percent per annum, that would still be worth about $56.2 billion. This is still a bigger sum, compared to what the entire Manhattan Island is worth, which he estimates based on tax records during the time he wrote his book to be only about $28.1 billion.
Although Lynch did not refer directly to stocks, the example may still be cited as a classic illustration of how stock investments will beat real estate if we assume the given rate of return to be that of stocks.
5.) Investing in the stock market forces you to learn.
When you invest in the stock market you are forced to read the business news and place significant meaning on major news stories. News to you do not only become something to be discussed over coffee but something that is of great interest to you, since you will know whether it will affect your investments or not. You will be compelled to understand terms used in finance and in business that you did not even dream of understanding. You will become smarter and you will be compelled to keep on learning and reading in order to expand your knowledge. If you slept through your economics or business class in college, your eyes will be wide open when you try to figure out what inflation means and how it impacts on your investments. Indeed, you will become very inspired to learn!
6.) Investing in the stock market gives meaning to the term “knowlege is power,” and will make you realize the importance of the Internet.
Today we live in the age of knowledge or the “information-technology age”. In the information-technology age, knowledge is power. For a lot of people, that term is considered just a mere adage. But with online trading, you will truly know what it really means. With the advent of the Internet, information is readily available at the click of the mouse. Online investing and trading is executed in a fraction of a second by merely letting your fingers do the walking. All of these you get to do in the comfort of your home or wherever in the world you might be.
To be continued
Zigfred Diaz is a registered financial planner of RFP Philippines. To learn more about stock selection and investing, attend the 10th Accredited Financial Analyst (AFA) program this January 2017. To inquire, e-mail firstname.lastname@example.org or text <name><e-mail> <AFP> at 0917-9689774.